Abstract:
ABSTRACT
This study therefore investigates the effect of Ghana’s exchange rate, inflation,
and interest rate on economic growth over the period 1980 to 2015 using
quarterly time series data. It examines the extent to which exchange rate
policy have been able to contribute to lowering the probability of currency and
banking crises, ensuring sustainable internal and external balance, and
containing inflation and interest rate. Given the political economy, more
openness, the structural wage-price processes, the degree of backward and
forward looking behavior in the Ghanaian economy, the paper draws out
implications for macroeconomic policy. The paper employs the Johansen’s co integration analysis within the framework of Vector Autoregressive (VAR) to
empirically investigate the effects of rate of exchange, inflation and interest
rateon economic growth since the adoption of floating exchange rate regime in
the country. The results indicated that, the past one year of inflation rate and
the past two years of interest rate had negative impacts on the growth of real
GDP in Ghana respectively while the past one year of exchange rate, had a
positive impact on the growth of real GDP in Ghana.The Granger Causality
test also indicated bi-directional causality between exchange rate and real
GDP, unidirectional causality between inflation, interest rate and GDP. The
study therefore clearly recommends that the government of Ghana and Bank
of Ghana intensify their efforts stabilising these policy variables as they are
capable of influencing the country’s macroeconomic policy decisions in both
short and long run.
